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Adverse Selection, Moral Hazard and the Demand for Medigap Insurance

Author

Listed:
  • Michael P. Keane

    (Nuffield College, University of Oxford)

  • Olean Stavrunova

    (University of Technology, Sydney, Australia)

Abstract
The size of adverse selection and moral hazard e ects in health insurance markets has important policy implications. For example, if adverse selection e ects are small while moral hazard e ects are large, conventional remedies for ineciencies created by adverse selection (e.g., mandatory insurance enrolment) may lead to substantial increases in health care spending. Unfortunately, there is no consensus on the mag- nitudes of adverse selection vs. moral hazard. This paper sheds new light on this important topic by studying the US Medigap (supplemental) health insurance market. While both adverse selection and moral hazard e ects of Medigap have been studied separately, this is the rst paper to estimate both in a uni ed econometric framework. Our results suggest there is adverse selection into Medigap, but the e ect is small. A one standard deviation increase in expenditure risk raises the probability of insur- ance purchase by 0.055. In contrast, our estimate of the moral hazard e ect is much larger. On average, Medigap coverage increases health care expenditure by 24%.

Suggested Citation

  • Michael P. Keane & Olean Stavrunova, 2014. "Adverse Selection, Moral Hazard and the Demand for Medigap Insurance," Economics Papers 2014-W02, Economics Group, Nuffield College, University of Oxford.
    • Handle: RePEc:nuf:econwp:1402
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    References listed on IDEAS

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    More about this item

    Keywords

    Health insurance; adverse selection; moral hazard; health care expendi- ture;
    All these keywords.

    JEL classification:

    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions

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